Public Money

Income inequality has reemerged as the central issue in American politics. States and localities across the country are considering a variety of responses, including raising the minimum wage, enacting rent control and expanding affordable housing. But how will we pay for these responses?

Advocates for the “99 percent” have built a simple and compelling story: They blame their situation on taxes, the super-fortunate “1 percent” and a broken promise. For decades, the story goes, the lower and middle classes permitted the rich to pay less than their fair share of federal taxes. More money in the private economy was supposed to mean stronger economic growth, more jobs and better opportunities for everyone else. But instead of reinvesting in America, the 1 percenters took the money and ran. Now the 99 percent want to put an end to tax exemptions, credits and other “tax preferences” that have done little to help them.
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Neither Congress nor the Obama administration had a response -- or even words of support -- when two large U.S. cities lurched into bankruptcy two years ago. And there still isn’t a response now as Puerto Rico, a U.S. territory, heads in that direction.

Well, that’s not entirely true. As Congress completed its 2016 budget resolution in May, it included for the first time in U.S. history a provision of singular discrimination. It barred so-called “bailouts” to municipal corporations, cities and counties -- none of which have ever been “bailed out” -- while leaving unchanged support for federal bailouts of nongovernmental corporations, such as major Wall Street banks and automobile companies.
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‘Tax modernization” was a trending topic in this year’s state legislative sessions. It joins “tax efficiency” and “tax fairness” as the latest benign-sounding way to talk about the thorny issue of who will pay for state and local government.

Modernization is tricky because different sides of tax policy debates deploy it to mean different things. To some, it means state and local governments should collect taxes more efficiently. To others, it means we should apply the taxes we have in new ways. A third group equates a modern revenue system with one that enlists lots of different types of taxes. Each of these groups envisions a unique tax system, but you need them all on board to get meaningful policy change. Tax modernization is a nice way to tie all three perspectives together.
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For years, we’ve been warned of the profound effect America’s rapidly aging population will have on our services. But there are two areas in particular where an aging population poses the largest threat to the fiscal future of states and localities: health-care costs and tax subsidies.

Let’s start with health-care costs, specifically the increasing costs of providing Medicaid coverage for an expanding population of elderly people in need of long-term care. Baby boomers born between 1946 and 1964 are more likely to live longer and exhaust their resources than previous generations. By 2050, when the youngest boomers will be in their 80s, long-term care for the elderly will devour roughly 3 percent of the U.S. economy, up from 1.3 percent in 2010, according to the Congressional Budget Office.
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The great philosopher-turned-catcher Yogi Berra once said, “It’s tough to make predictions, especially about the future.” Apparently he knew finance like he knew baseball. This past decade we’ve seen a parade of financial developments that few people predicted, starting with a real estate crisis and continuing through today’s sluggish and uneven economic recovery.

Even when financial soothsayers are wrong about the future, they force us to think about why it will look the way it will. In other words, they challenge the conventional wisdom. A recent financial prediction -- known as “the new neutral” -- is no exception.
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